Venezuela on the Brink

Venezuela goes to the polls on Sept. 26 in a parliamentary election that opponents of President Hugo Chavez see as “a chance to turn the tide,” as Reuters news service puts it. Chavez may be taking on more authoritarian powers, but he also has to defend what the latest data show is the worst economy in the world. And you thought the Democrats had problems!

The Economist magazine provides statistics weekly on 57 nations, from the United States to Estonia. Its most recent report forecasts that gross domestic product in Venezuela will decline by 5.5 percent in 2010. Next worst is Greece, with a 3.9 percent decline. Greece, of course, came close to defaulting on its debt earlier this year, and analysts at Morgan Stanley worry that Venezuela is moving in the same direction.

“Our new baseline of at least three years of economic contraction suggests the risks to Venezuela’s ability to honor its international financial commitments may be on the rise,” wrote Daniel Volberg and Giuliana Pardelli in a June report, at the same time predicting that GDP will fall by 6.2 percent in 2010. “While most of Latin America, in line with the globe, has been in recovery mode since last year, Venezuela has seen an intensifying downturn in activity,” they added.

So that’s GDP, the single best measure of economic health. When it comes to inflation, no one is close to Venezuela. Consumer prices are already up 31 percent for 2010 and are expected to rise more by year-end. Only two of the remaining 56 nations monitored by the Economist are suffering double-digit inflation: India and Egypt, both with 11 percent price increases.

Venezuela’s stagflation is all the more remarkable because, as the No. 8 oil-producing nation in the world, the country should be benefiting handsomely from high oil prices.

These results, however, should come as no surprise. Venezuela is suffering from serious economic mismanagement as the central government takes control of more and more sectors. Over the last three years, Chavez has nationalized firms in such industries as cement, steel, agribusiness, banking, tourism, oil, communications, and electricity.

Chavez has another problem: violent crime. Caracas, the capital, has nine times the homicides per 100,000 people as Bogota and 15 times the rate of Sao Paulo. Overall, according toNewsweek, Venezuela has “the worst murder rate in the hemisphere,” and it has helped push “President Chávez’s approval ratings off a cliff.”

Indeed. In a survey last month, Consultores 21 found that only 36 percent of Venezuelans approved of Chavez’s performance, a seven-year low.

Chavez has responded to these ills by shutting down media outlets, restricting economic freedom, blaming his critics, and throwing political opponents and businessmen in jail.

In March, he imprisoned Oswaldo Alvarez Paz, after the former state governor said on Globovision TV, “The Venezuelan regime has relations with structures that serve narco-trafficking, like the FARC [the Colombian terror group] and others which exist in the continent and the world.” In May, a retired general, Raul Isaias Baduel, once Chavez’s defense minister but now a critic, was sentenced to a prison term of nearly eight years on charges of misappropriation of funds. Those two join what Reuters calls “a list of several dozen Chavez opponents now in jail, living in exile or facing probes.”

Earlier this summer, the government issued an arrest warrant for Guillermo Zuloaga, the principal owner of Globovision, which the New Republic, in a blistering editorial about Chavez, called “the country’s last remaining major TV station with sympathy for the opposition.”

The pattern is clear: like Gen. Baduel, the charges against Zuloaga were economic — in this case, that he “hoarded” automobiles on his property, a strange claim that had been made against him before and shelved. Zuloaga was to be held in one of the most notorious prisons in Latin America, but he fled the country and is now in exile.

In an interview in July with Mary O’Grady of the Wall Street Journal, Zuloaga said the arrest warrant came because his TV station has been reporting the dire conditions in Venezuela today. “The quality of Venezuelan life is deteriorating considerably, at the same time one of the biggest corruption scandals has come out with 70,000 tons of food rotting in the ports,” he said. “We have problems with electricity, problems with water, the highest crime rate of any place. … The Chávez government has infringed almost every article of the constitution.”

At the time of Zuloaga’s arrest, the government also seized control of Banco Federal, claiming that the bank was not meeting liquidity requirements. Nelson Mezerhane, the bank’s president, is a major investor in Globovision, and the Wall Street Journal reported that the connection with Zuloaga was “the actual reason the bank was seized.” Mezerhane has also fled the country.

Unlike Zuloaga and Mezerhane, another prominent businessman, Ricardo Fernandez Barrueco, a billionaire banker and food supplier, is languishing in jail. Barrueco’s case was likened in an article on Forbes.com to that of Mikhail Khodorkovsky, the former CEO of the energy giant Yukos and a critic of former Russian President Vladimir Putin. Barrueco was first imprisoned in November and not charged with alleged banking violations until July. Barrueco’s assets, ranging from tuna boats to trucking fleets to shares in such companies as flour maker Molinos Nacionales, have been seized by the government.

Also targeted by Chavez is another food-production executive, Lorenzo Mendoza. A Miami Herald article in July reported that “Chávez is gunning for Empresas Polar, the country’s giant food and beer conglomerate. The company, owned by the Mendoza family, is an obstacle to the government’s plans for state control of the food industry.”

Once again, Chavez is accusing someone of “hoarding” — in the case of Mendoza, it’s food rather than cars. The Herald article quotes an expert, however, as saying that the government has already mismanaged the part of the food-production sector it already controls. If Empresas Polar is taken over, says Carlos Machado Allison of the IESA business school in Caracas, “there would be terrible unemployment and many producers would have nowhere to place their products.”

In an attempt to prevent Venezuelans from learning what is happening in their country, Chavez has been dismantling independent media. In 2007, RCTV, the popular over-the-air television station launched more than 50 years ago, lost its broadcast license for criticism of Chavez. RCTV then moved to cable, where it became the most popular network but soon ran afoul of Chavez again. Dozens more stations have been shuttered. Chavez’s latest move, in June, was the creation of what Human Rights Watch calls an all-powerful “censorship office.”

Last month, a photo on the front page of the newspaper El Nacional showed more than a dozen corpses of homicide victims in the morgue. It caused outrage at the government, which responded by ordering the paper to stop publishing any images of violence, “as if that would quiet growing questions about why the government — despite proclaiming a revolution that heralds socialist values — has been unable to close the dangerous gap between rich and poor and make the country’s streets safer,” wrote reporter Simon Romero in an article in the New York Times.

But even a news blackout would not prevent Venezuelans from knowing firsthand what is happening to their nation’s economy. Retail sales were down 12 percent in the first half of the year; sales of food, beverages, and tobacco in specialty stores were off 30 percent. Chavez slapped on permanent exchange controls to prevent “the oligarchy from taking U.S. dollars and depositing them in banks around the world.” But like most such controls, they have only panicked investors and businesses and led to more capital flight. Figures from the Central Bank of Venezuela showed $9 billion in capital outflows in the first half of the year.

As they go to the polls this month, Venezuelans will undoubtedly be concluding that arrests, censorship, and other restrictions on liberty are no substitute for economic and political freedom and sensible public policy.

About the Author

James K. Glassman, former undersecretary of state for public diplomacy and public affairs, is executive director of the George W. Bush Institute in Dallas.